A UK-based professional trustee firm, Independent Governance Group (IGG), has called on the government to use its Mansion House Reforms to help resolve ‘intergenerational unfairness’ between defined benefit (DB) and defined contribution (DC) scheme members.

In its response to the Options for DB schemes consultation, IGG identifies the lack of incentive to take necessary level of investment risk, and the lack of mitigation of the risks involved, as the key barriers to achieving the government’s desire to make more innovative use of pension scheme assets to support the UK economy.

To encourage corporate DB pension schemes to build a surplus, IGG believes plan sponsors should be offered the chance to deploy some, or all, of that surplus to boost DC contributions ahead of winding-up a scheme.

Supplementing DC funds in this way would not only promote investment in productive assets, but would go some way to close the gap in outcomes for DB and DC scheme members, which is a key driver in the growing financial divide between generations, the firm said.

Andrew Bradshaw, chief executive officer of IGG, said: “We have proposed ideas regarding surplus reforms within an appropriate framework and with clear and proportionate regulatory supervision. We believe this approach will enable trustees to demonstrate to sponsors how schemes can invest in productive assets with acceptable levels of risk and with members’ interests at the forefront. This is a win-win for employers, the government and the UK economy.”

Incentives and risk

IGG believes it would be beneficial for the government to focus its efforts on addressing two main barriers to increased investment in productive assets in the UK: incentives and risk.

“We believe reform of surplus rules could give way to greater investment in productive assets. Allowing the use of a surplus for a wider range of benefits within an appropriate framework with clear and proportionate regulatory supervision is good for employers, trustees and the economy alike,” the group stated.

To enable schemes to invest in other assets it would also help to bring into the mix an adjustment to how liabilities are valued and paid for. “We see [The Pensions regulator] TPR’s amendments to the superfund guidance recently recognise change is needed,” it said.

“If the government is not aligned with incentivising employers, a consequence will be that the main aim for most employers will be to buy out schemes with insurance companies as soon as practicable,” IGG noted, explaining that on buy-out, the pension scheme will sell its gilts; however, insurers are not in the market for large quantities of inflation-linked Gilts and there are typically no other buyers of these assets, meaning increased government borrowing.

“Incentivising schemes to remain invested in Gilts may prove to be a necessary policy for government to protect its own borrowing.”

IGG added that investing in productive assets is likely to result in the plan sponsor and trustees taking more risk. “We recommend that government at the very least provides a clear definition of productive assets, what it wants to see pension funds invest in and what effect the reforms hope to achieve,” it said.

The group noted that reform is also needed to protect pension scheme investors so they feel able to invest, urging the government to work with the industry to provide an equivalent form of protection. “We propose an underlying guarantee – for pension schemes (who don’t pay tax) to manage the risk so trustees can invest without worrying about what happens should a large deficit appear.” 

Pension trustee skills

In its response to the call for evidence on Pension trustee skills, capability and culture, IGG also highlights several barriers which the government needs to address across DC and DB schemes for its plans to succeed, while warning against the risk of deterring people from becoming lay trustees.

Bradshaw noted that the recent increase in pensions-related regulation and legislation, coupled with major events such as the liability-driven investments (LDI) crisis, means the need for a higher level of knowledge and understanding on trustee boards.

“We support a move to mandate the appointment of a professional trustee for all schemes over a workable timeframe, but caution against the potential unintended consequences of implementing an accreditation regime for lay trustees that deters people from coming forward,” he said, warning that the broad range of skills, qualifications, and experience of lay trustees, together with their first-hand knowledge of the businesses that sponsor pension schemes, “is a vast resource that has helped to underpin good governance”.

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